Announcements by oil companies of record results and recent high crude oil prices have led to the suggestion that oil companies should cut the price of petrol and offset subsequent losses against profits being made from crude oil production.

However, there are two very good reasons why the various parts of the business in integrated oil companies have to stand alone:

1. Competition: The UK petrol retailing market is one of the most competitive in the world. Competition in the sector has led to prices which, before excise duty and VAT are added, are among the lowest in Europe.

All petrol retailers, including those without an upstream activity, have to obtain their petrol supplies at international prices. It has been suggested that integrated oil companies could sell petrol at below established retail market prices by offsetting subsequent losses against earnings from their other, more profitable, business activities. However, this could seriously affect the ability of hypermarkets and independent petrol retailers to compete. In certain circumstances, this could be viewed as anti-competitive by the competition authorities and against the long-term interests of the consumer.

2. Investment: The oil and gas exploration and production industry is high risk and capital intensive, particularly in the North Sea. It is an enormous contributor to the UK economy and sustained investment is crucial to maximise recovery of Britain's remaining oil and gas reserves. Companies need to deliver acceptable returns to retain the confidence of investors.

Many years of planning and development are required to secure new oil and gas production, and then the production cycle itself typically can take 10 to 15 years or more. Projects require massive up-front capital investment, incur significant operational costs and entail many risks and uncertainties, including the unpredictable nature of oil and gas prices. Oil companies and their shareholders take a long-term view of these investments and expect to earn an adequate return that recognises the high risks involved.

At the end of the 1990s, crude oil prices slumped to $10 a barrel, with consequently poor earnings and unacceptable profitability. Prices have since increased, but they have a long history of going up and down. Any judgement on profitability must consider the longer term, not merely today's level.

ExxonMobil is a major investor in the North Sea oil and gas industry, investing several hundred million pounds each year. Since the start of North Sea exploration activities in 1964, we have invested some £31 billion in today's money.

Tight margins

Petrol prices in the UK are high because a high proportion of the pump price is excise duty and VAT. This is the highest level of tax in Europe. When taxes are excluded, UK petrol prices are among the lowest in Europe.

The UK petrol retailing business remains extremely competitive and margins are very tight. When taxes and the cost of producing the fuel are excluded, just a few pence per litre are left for the retailer and the oil company.

This margin has to cover the cost of getting the product from the refinery to the distribution terminal, storing it, putting in additives to improve performance and trucking it to the retailer; the wages of the retailer's staff and other costs of running the site, including credit card charges; promotions and marketing costs; as well as generating an income for the retailer and a return on investment for both the retailer and the oil company.

The margins earned by the petrol retailing industry have been falling in real terms since the1960s. With little incentive to remain in the retail business, some petrol retailers have left the industry, whilst some oil companies have chosen to focus only on upstream activities.

ExxonMobil remains committed to the UK fuels market and is working hard to improve total profitability in the downstream business in order to maintain the necessary investment for this major business sector.